The Big Bath Hypothesis: Accruals Management in Response to Dividend Reduction and Omission

Lee, Picheng
June 2006
International Journal of Management;Jun2006, Vol. 23 Issue 2, p281
Academic Journal
The purpose of this study is to examine the association between income-decreasing discretionary accruals and the magnitude of dividend reductions. Managers of dividend reducinglomitting firms are hypothesized to take a big bath in earnings using income decreasing discretionary accruals in order to remove future earnings drags, thereby helping to ensure prolonged earnings improvement. Such strategic accruals management in turn enables firms to achieve better performance in the future as well as achieve a quick turnaround in their subsequent operating performance after a significant dividend reduction or omission.


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